July 24 (Bloomberg) -- The European Union is preparing to
sanction Russia’s most senior spies and security officials as it
seeks to step up its response to the conflict in Ukraine, where
the premier quit after the ruling coalition broke apart.

Alexander Bortnikov, director of the Federal Security
Service which replaced the Soviet-era KGB, and Mikhail Fradkov,
the head of the Foreign Intelligence Service, are on the
provisional list of sanctioned Russian officials, according to a
draft document obtained by Bloomberg News. In Kiev, Prime
Minister Arseniy Yatsenyuk resigned after two parties quit the
governing coalition and President Petro Poroshenko signaled his
support for early elections.

“We expect that the coalition will probably be quickly
back in place after elections,” Vladimir Osakovskiy, an
economist in Moscow at Bank of America Corp., said by e-mail.
“The main implication is that the new Rada will be even more
anti-Russian and pro-EU than it is right now.”

Yatsenyuk’s government, which took charge of Ukraine in
February, has battled a pro-Russian insurgency in the east of
the country, which it says is supported by the authorities in
Moscow. With the U.S. pushing Europe to toughen its stance
toward Russia a week after a Malaysian passenger jet was shot
down over rebel-held territory in Ukraine, the EU moved to
expand sanctions and to penalize some officials who served
alongside President Vladimir Putin in the Cold War.

The planned sanctions weren’t as far-reaching as some
investors had expected. Russian stocks gained for a third day in
New York trading, with the Bloomberg Russia-US Equity index
rising 0.4 percent to 87.03 as of 1:06 p.m. in New York.

The EU measures now touch close KGB associates of Putin, a
former colonel in the intelligence service who served in East
Germany. Like 61-year-old Putin, Bortnikov, 62, joined the KGB
in 1975. The list also includes the head of the Security
Council, Nikolai Patrushev, and Kremlin-backed Chechen leader
Ramzan Kadyrov.

The new sanctions list, which was due to be expanded even
before the downing of the Malaysian Air jet killed 298
passengers and crew, targets companies and entities linked to
the pro-Russian insurrection and the annexed Crimea peninsula.
The list of 15 individuals and 18 entities is separate from
proposals circulated today by the European Commission to put
further pressure on Putin’s government.

Crash Probe

Data from the downed Malaysian jet’s black boxes has been
successfully downloaded, with the examination of bodies also
under way as crash experts seek evidence of a missile strike.

The U.K. Air Accidents Investigation Branch gained access
to the Boeing Co. 777’s flight-data readings today after
yesterday retrieving cockpit-voice recordings, according to
Dutch authorities who are leading the probe in recognition of
the fact that almost 200 victims were from the Netherlands.

Specialists from the Dutch National Forensic Investigation
Team are working in Kharkiv in government-controlled Ukraine
after some of the 298 dead were moved there by train, with
bodies being flown on to the Netherlands.

Coalition Collapse

As Ukraine’s allies sought to ramp up pressure on Russia,
Yatsenyuk told the parliament in Kiev today that he’s stepping
down after losing his partners’ backing and failing to pass
legislation. Former world boxing champion Vitali Klitschko’s
UDAR and Svoboda, a nationalist group, said they’d leave the
coalition and seek a snap parliamentary ballot, according to
statements today on their websites.

Volodymyr Hroisman was appointed acting premier, according
to Interior Minister Arsen Avakov, although no official
announcement has yet been made. The government is scheduled to
hold an extraordinary meeting at noon tomorrow.

“The coalition has fallen apart, laws haven’t been voted
on, soldiers can’t be paid, there’s no money to buy rifles,
there’s no possibility to store up gas,” Yatsenyuk told
lawmakers. “What options do we have now?”

Ukraine’s parliament must approve Yatsenyuk’s resignation,
according to the constitution. The breakup of the coalition
“was probably agreed on by political parties seeking elections
and the president,” Yuriy Yakymenko, the head of political
research at Kiev’s Razumkov Center, a non-governmental policy
group, said by phone.

Eastern Insurrection

With the Ukrainian government trying to choke the
insurrection in the country’s easternmost regions, the U.S. said
it had evidence of artillery being fired from within Russia to
attack Ukrainian military positions. Speaking at a daily
briefing in Washington, U.S. State Department spokeswoman Marie
Harf said the U.S. has also learned that Russia plans to
“deliver heavier and more powerful multiple rocket launchers to
the separatist forces.”

American officials have also said that the Malaysian plane
was hit by a missile that was probably fired from a Russian-supplied launcher.

Putin has said his opponents are using the crash for
“selfish political gains,” and officials in Moscow have
suggested that the plane was hit by Ukrainian government forces.

EU Blacklist

The new EU blacklist covers nine separatist organizations
and militias in eastern Ukraine and nine state-owned Crimean
companies that were seized by Russia after it annexed the Black
Sea peninsula in March.

Under the plan discussed today in Brussels, the 28-member
bloc is also considering a ban on European purchases of bonds or
shares sold by Russia’s state-owned banks among the options for
stepped-up sanctions on the Kremlin, according to a proposal
presented to member states.

Previously, the EU had blacklisted 72 people and two state-owned Crimean companies. People on the list face asset freezes
and travel bans; companies and organizations face asset freezes,
barring them from doing business in the EU.

The EU plans to add further names to the list, widening its
net to catch people and companies with ties to “Russian
decision-makers” responsible for the March takeover of Crimea
and infiltration of eastern Ukraine.

Those additional names -- dubbed the “cronies list” by EU
officials because it would take aim at confidants of Putin --
will be announced in the coming days.

U.S. Secretary of State John Kerry said July 20 that
European leaders should see the attack on the passenger airplane
as “a wake-up call.”